Under the U.K. takeover rules, made infamous by the failed Pfizer/AstraZeneca marriage over in the world of Big Pharma, companies must wait 6 months to make an acquisition bid under certain circumstances, such as if a company walks away from a deal. Now the clock is about to strike 6 months since Stryker ($SYK) expressed interest in acquiring Smith & Nephew ($SNN), only to be dissuaded by a rise in that company's stock price once news of the potential deal broke out. And so begins the speculation that Stryker will actually make a bid on the fellow orthopedics company this time around.
Bloomberg reports that Kalamazoo, MI-based Stryker is discussing the financing and antitrust hurdles around a possible bid for Smith & Nephew. History could repeat itself. Smith & Nephew shares rose as much as 10% on the news, before falling slightly, but remain above their prior levels, giving the company a value of about $16 billion, according to Bloomberg.
The watershed Pfizer/AstraZeneca non-deal also introduced the public to the term inversion, whereby companies re-domicile themselves in countries with a lower tax rate to obtain financial benefits. Stryker is considering that possibility, according to Bloomberg, given that the U.K.'s corporate tax rate of 21% is below the U.S.'s 35% (though many American companies pay less than that due to loopholes and exceptions). The Treasury Department recently took steps to make inversion deals harder and less attractive, following a surge in use of the tax lowering strategy, especially among pharma and device companies.
The deal could be prompted by the impending $13 billion merger of Zimmer ($ZMH) and Biomet, as orthopedics companies gain size to increase leverage in negotiations with hospitals--who are themselves consolidating and adopting new tactics such as the adoption of few brands of implants, all in an effort to buy in greater bulk.
While an expanded Zimmer may increase Stryker's sense of urgency to get bigger, it also makes the transaction tougher to pull off. "You have a different hurdle rate now given that the industry will likely be more consolidated than it was six or 12 months ago," Bloomberg Intelligence Jason McGorman, told Bloomberg in another article on the topic. "Whether or not that means it's a larger antitrust risk, that's something we're going to look at."
Medtronic ($MDT) was also rumored to be interested in Smith & Nephew, but a surprise bid from that industry bigwig looks very unlikely because it is currently trying to swallow Covidien ($COV) for $43 billion, in the industry's largest deal of the year, and an inversion one as well.
On top of the acquisition rumors, Smith & Nephew has been subject to constant rumors that its French CEO, Olivier Bohuon, will jump ship to French pharma giant Sanofi ($SNY).
Assuming the Zimmer/Biomet deal overcomes antitrust hurdles, and the rumored deal Stryker / Smith & Nephew deal transpires (a big if), there would be three big players left in the orthopedics industry: Johnson & Johnson's ($JNJ) DePuy, the new Zimmer and a larger Stryker.
Editor's Note: This article has been updated with a quote from Jason McGorman.